Question

Ace Industries has current assets equal to $9 million. The company's current ratio is 2.0, and its quick ratio is 1.5. Do not round intermediate calculations. Round your answers to the nearest dollar. What is the firm's level of current liabilities? $ What is the firm's level of inventories?

Answer 1

The correct answer is current liabilities is equal to $4.5 million and firm's level of inventory is $2.25 million.

Step-by-step explanation:

Both current ratio and quick ratio are know as liquidity ratio which tells about the ability of a firm to meet its short term obligations.

The only difference between these two ratio is of taking inventory and prepaid expenses in to account, as while calculating the quick ratio we don't take inventory and prepaid expenses in to account.

Formula for current ratio =
`(CURRENT ASSET)/(CURRENT LIABILITIES)`

Where the current ratio is 2.0 and current assets is equal to $9 million,

`(\$9\ million)/(CURRENT\ LIABILITIES)= 2.0`

CURRENT LIABILITIES = $4.5 MILLION

Formula for quick ratio =
`(QUICK ASSETS)/(CURRENT LIABILITIES)`

Here current liabilities = $4.5 million,

Quick asset = current assets - inventory

`(\$9\ MILLION - INVENTORY)/(\$4.5\ MILLLION)= 1.5`

INVENTORY = $9 MILLION - $6.75 MILLION

INVENTORY = $2.25 MILLION

Answer 2

Answer: current liability = 4.5 million

inventory = 2.25 million

Explanation: Current ratio can be defined as a liquidity ratio that is used to analyze whether the company has enough resources to fulfill its short term obligations. It is computed as follows :-

`current\:ratio\:=(current\:assets)/(current\:liability)`

`current\:ratio\:=\:(9million)/(current\:liabilities)`

therefore,

current liabilities=
`(9\million)/(2)`

= 4.5 million

.

Quick ration is more stringent liquidity ratio. It is computed as follows :-

`quick\:ratio\:= (current\:assets\:-\:inventories)/(current\;liabilities)`

`1.5\:=(9)/(4.5)`

solving this equation we get

inventory = 2.25 million